Reply Brief — Texas, et al., Petitioners v. Commissioner of Internal Revenue, et al.

No. 21-379

In the Supreme Court of the United States

TEXAS, ET AL., PETITIONERS,

v.

COMMISSIONER OF INTERNAL REVENUE, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

REPLY IN SUPPORT OF

PETITION FOR A WRIT OF CERTIORARI

KEN PAXTON

Attorney General of Texas

BRENT WEBSTER

First Assistant Attorney

General

OFFICE OF THE

ATTORNEY GENERAL

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

Judd.Stone@oag.texas.gov

(512) 936-1700

JUDD E. STONE II

Solicitor General

Counsel of Record

LANORA C. PETTIT

Principal Deputy Solicitor

General

CODY RUTOWSKI

Assistant Solicitor General

TA BLE O F C O NTE N TS

Page

Table of Authorities ................................................... II

Introduction ................................................................. 1

I. The Constitutionality of the Certification Rule,

Which Controls Access to Billions of Dollars in

Federal Funding, Merits This Court’s Review. .. 1

A. The federal government cannot delegate

control over Medicaid funding to private

parties. .............................................................. 1

B. Even if Congress can delegate some authority

to private parties, agencies cannot. ................ 4

C. The Fifth Circuit’s decision creates a circuit

split on when and how agencies may delegate

authority to private parties. ............................ 4

II. The Fifth Circuit’s Statute of Limitations Ruling

Creates a Circuit Split About an Important

Federal Question. .................................................. 7

III. This Is a Proper Vehicle to Resolve the

Questions Presented. .......................................... 10

Conclusion.................................................................. 12

(I)

II

TA BLE O F AU T HO R I TIE S

Page(s)

Cases:

Ala. Ass’n of Realtors v. Dep’t of Health &

Hum. Servs.,

141 S. Ct. 2485 (2021) ..................................................... 3

Bennett v. Spear,

520 U.S. 154 (1997) ......................................................... 8

Boerschig v. Trans-Pecos Pipeline, L.L.C.,

872 F.3d 701 (5th Cir. 2017) .......................................... 3

Bowen v. Massachusetts,

487 U.S. 879 (1988) ....................................................... 11

Cal. Sea Urchin Comm’n v. Bean,

828 F.3d 1046 (9th Cir. 2016) .................................. 8, 10

Chafin v. Chafin,

568 U.S. 165 (2013) ....................................................... 11

Dep’t of Transp. v. Ass’n of Am. R.Rs. (Amtrak),

575 U.S. 43 (2015) .................................................... 1-2, 3

Dunn-McCampbell Royalty Int., Inc. v.

Nat’l Park Serv.,

112 F.3d 1283 (5th Cir. 1997) ...................................... 10

Fund for Animals v. Kempthorne,

538 F.3d 124 (2d Cir. 2008) ........................................ 6, 7

Gen. Elec. Co. v. E.P.A.,

290 F.3d 377 (D.C. Cir. 2002) ........................................ 9

Gundy v. United States,

139 S. Ct. 2116 (2019) ..................................................... 3

Louisiana v. U.S. Army Corps of Eng’rs,

834 F.3d 574 (5th Cir. 2016) .......................................... 9

Me. Cmty. Health Options v. United States,

140 S. Ct. 1308 (2020) ................................................... 11

III

Page(s)

Cases (ctd.):

Nat’l Fed’n of Indep. Bus. v. Sebelius,

567 U.S. 519 (2012) ......................................................... 7

Nat’l Env’t Dev. Ass’n’s Clean Air Project v.

E.P.A.,

752 F.3d 999 (D.C. Cir. 2014) ................................. 9, 10

S. Pac. Transp. Co. v. Watt,

700 F.2d 550 (9th Cir. 1983) .......................................... 5

U.S. Telecom Ass’n v. F.C.C.,

359 F.3d 554 (D.C. Cir. 2004) ................................ 4, 5, 6

United States v. Matherson,

367 F. Supp. 779 (E.D.N.Y. 1973) ................................. 5

United States v. Munsingwear, Inc.,

340 U.S. 36 (1950) ......................................................... 12

United States v. Picciotto,

875 F.2d 345 (D.C. Cir. 1989) ........................................ 8

Wellness Int’l Network, Ltd. v. Sharif,

575 U.S. 665 (2015) ......................................................... 2

Constitutional Provisions, Statute and Rules:

28 U.S.C. § 2401(a) ............................................................... 9

42 C.F.R. § 438.6(c) (2002) ................................................... 7

Sup. Ct. R.:

10(a) ............................................................................. 1, 7

10(c) .............................................................................. 1, 7

Other Authorities:

Aaron Mendelson et al., New Rules of Medicaid

Managed Care—Do They Undermine Payment

Reform?, 4 HEALTHCARE 274 (2016) ........................... 8

IV

Page(s)

Other Authorities (ctd.):

Alexander Volokh, The New Private-Regulation

Skepticism: Due Process, Non-delegation,

and Antitrust Challenges, 37 HARV. J.L. &

PUB. POL’Y 931 (2014) .................................................... 2

In 2002, finding it too hard to give meaning to Medicaid’s requirement that state Medicaid contracts with

managed-care organizations (MCOs) be “actuarially

sound,” HHS punted the question to a private entity, the

Actuarial Standards Board. The Board waited to exercise that authority until 2015, when it promulgated Actuarial Standards of Practice No. 49 (ASOP 49). HHS’s delegation of authority to create federal law regarding a

program that represents a quarter of many States’ budgets to a private entity violates the most fundamental precepts of our federal system, and the Board’s exercise of

that unconstitutionally delegated authority triggered a

new statute of limitations that makes the PlaintiffStates’ lawsuit timely. By holding otherwise, the Fifth

Circuit created circuit splits on important questions of

federal law that merit this Court’s review. See Sup. Ct.

R. 10(a), (c).

I. The Constitutionality of the Certification Rule,

Which Controls Access to Billions of Dollars in

Federal Funding, Merits This Court’s Review.

A. The federal government cannot delegate

control over Medicaid funding to private

parties.

The United States acknowledges that “[a] federal

agency may not ‘abdicate its statutory duties’ by delegating them to a private entity.” Response 15 (quoting Pet.

App. 17a). For good reason: as the petition explains (at

15-16), the Executive’s own constitutional authority permits an agency to take actions that can—at the margin—

resemble legislation. But as members of this Court have

recognized, there “is not even [that] fig leaf of constitutional justification” for delegation to private entities.

Dep’t of Transp. v. Ass’n of Am. R.Rs. (Amtrak), 575

(1)

2

U.S. 43, 62 (2015) (Alito, J., concurring); see also, e.g.,

Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665, 70001 (2015) (Roberts, C.J., dissenting) (“It is a fundamental

principle that no branch of government can delegate its

constitutional functions to an actor who lacks authority

to exercise those functions.”).

And yet that is exactly what HHS did through the

Certification Rule, which purports both to make the

Board’s standards binding federal law and to give private

actuaries a veto over capitation rates in an MCO contract. The Certification Rule thus is an unconstitutional

delegation to a private entity. Petition 18-22. In its response, the United States gives two reasons (at 15-20)

why the Court should not be concerned that private parties

are

controlling access to billions of federal dollars. Neither

has merit.

First, the United States insists (at 17-18) that because the Board is a disinterested party, the Certification Rule does not present the due-process concerns

raised in many private delegation cases. This argument

conflates two problems with private delegation: fairness

to the regulated and power for the regulator. Alexander

Volokh, The New Private-Regulation Skepticism: Due

Process, Non-delegation, and Antitrust Challenges, 37

HARV. J.L. & PUB. POL’Y 931, 974 (2014). The latter problem is at issue here. Plaintiff-States’ “[n]on-delegation

doctrine” challenge to the Certification Rule “is structural and seeks to ensure that Congress makes the important decisions,” which are then enforced by the Executive as interpreted by the Judiciary. Id. Because the

Board is none of these institutions, “the Vesting

Clauses . . . categorically preclude it from exercising the

legislative, executive, or judicial powers of the Federal

3

Government.” Amtrak, 575 U.S. at 88 (Thomas, J., concurring in the judgment). 1

Second, the federal government asks (at 16-17) that

the Court allow this delegation to slide because HHS

could have achieved the same substantive result “by

promulgating regulations that adopted the substance of

the . . . Board’s standards.” “To say that HHS can empower the Board to write whatever standards it chooses

because it ‘could achieve exactly the same result’ by

adopting the ‘Board’s standards’ is to say that process

doesn’t matter.” Pet. App. 185a n.5 (Ho, J., dissenting)

(citation omitted). But process is at the heart of the

structural provisions of our Constitution, which are

“about respecting the people’s sovereign choice to vest

the legislative power in Congress alone,” and thereby

“protect their liberties, minority rights, fair notice, and

the rule of law.” Gundy v. United States, 139 S. Ct. 2116,

2135 (2019) (Gorsuch, J., dissenting). This Court has held

that “when it comes to the Constitution and the separation of powers, the ends do not justify the means.” Pet.

App. 186a n.5 (Ho, J., dissenting); e.g., Ala. Ass’n of Realtors v. Dep’t of Health & Hum. Servs., 141 S. Ct. 2485,

2486 (2021) (per curiam). The same principles doom the

Certification Rule.

For similar reasons, the federal government cannot rely (at 1920) on state law delegating authority to private entities. “[F]ederal

separation-of-powers concerns . . . cannot dictate how state governments allocate their powers.” Boerschig v. Trans-Pecos Pipeline,

L.L.C., 872 F.3d 701, 707 (5th Cir. 2017). States differ on whether

their legislatures may delegate legislative authority. Volokh, supra,

at 963-70.

1

4

B. Even if Congress can delegate some authority

to private parties, agencies cannot.

The United States cannot avoid the conclusion that

the Certification Rule is unconstitutional by citing (at 1719) instances in which Congress permitted private entities some role in setting federal standards. Assuming

those statutes pass constitutional muster, “[t]here is

good reason to limit” the cases the United States cited

“to only those delegations authorized by Congress itself”: Congress “has express constitutional authority to

legislate” and “is directly accountable to the American

people. Neither is true of administrative agencies.” Pet.

App. 176a (Ho, J., dissenting). “[W]hen an agency delegates power to outside parties, lines of accountability

may blur, undermining an important democratic check

on government.” U.S. Telecom Ass’n v. F.C.C., 359 F.3d

554, 565-66 (D.C. Cir. 2004).

C. The Fifth Circuit’s decision creates a circuit

split on when and how agencies may delegate

authority to private parties.

The constitutionality of the Certification Rule is worthy of this Court’s review because it creates a circuit split

with the D.C. and Second Circuits. The United States’s

attempts to distinguish these cases fall flat.

1. The D.C. Circuit held in U.S. Telecom Ass’n v.

F.C.C. that an agency may not “subdelegate [its] decision-making authority to . . . outside entities . . . absent

affirmative evidence of authority to do so.” Id. at 566.

The United States does not attempt to argue that Congress authorized HHS to delegate its rulemaking authority to the Board. Instead, the United States tries (at

21) to distinguish Telecom by re-labeling HHS’s delegation of substantive rulemaking authority as HHS adopting “‘reasonable conditions’ that make ‘federal approval’

5

of capitation rates contingent upon ‘an outside party’s

determination of [an] issue.’”

The distinction the United States seeks to draw is

without merit because the Certification Rule does not involve the type of “reasonable conditions” contemplated

in Telecom. Specifically, Telecom cited instances where a

regulated party needed approval from multiple government entities to take a given action. See Telecom, 359

F.3d at 567 (citing United States v. Matherson, 367 F.

Supp. 779, 782-83 (E.D.N.Y. 1973), aff’d 493 F.2d 1339

(2d Cir. 1974); S. Pac. Transp. Co. v. Watt, 700 F.2d 550,

556 (9th Cir. 1983)). Under those circumstances, the D.C.

Circuit concluded that it was permissible for the federal

agency to condition its approval on the regulated entity

first obtaining the approval of other governmental bodies. See id. Federal agencies thus “weren’t subordinating

their authority to outside entities—they were refusing to

waste agency resources on futile approvals.” Pet. App.

180a (Ho, J., dissenting). Here, by contrast, “[t]he private Board and private actuaries would have no say at all

in the approval of capitation rates or MCO contracts but

for HHS’s decision to hand them its rulemaking and review powers in the first place.” Pet. App. 180a.

To buttress its false distinction, the United States relies (at 22) on the D.C. Circuit’s statement that the distinction between subdelegations to government entities

and subdelegations to private entities “d[id] not alter the

analysis,” Telecom, 359 F.3d at 566. But the federal government takes that line out of context: the D.C. Circuit

was referencing a distinction between an agency’s “subdelegation to a subordinate” federal officer or agency

and an agency’s “subdelegation to an outside party.” Id.

at 565. The D.C. Circuit concluded that “while federal

agency officials may subdelegate their decision-making

6

authority to subordinates absent evidence of contrary

congressional intent, they may not subdelegate to outside entities—private or sovereign—absent affirmative

evidence of authority to do so.” Id. at 566; see also Pet.

App. 179a n.3 (Ho, J., dissenting). The United States

does not dispute that such evidence is lacking here. The

Fifth Circuit’s decision upholding the Certification Rule

thus creates a split between the Fifth and D.C. Circuits.

2. The federal government’s attempt to distinguish

the Fifth Circuit’s decision from the Second Circuit’s decision in Fund for Animals v. Kempthorne, 538 F.3d 124

(2d Cir. 2008), similarly fails. In Fund for Animals, the

Second Circuit recognized that “[i]f all [an agency] reserves for itself is ‘the extreme remedy of totally terminating the [delegation agreement],’ an agency abdicates

its ‘final reviewing authority.’” Id. at 133 (last alteration

in original) (citation omitted). The United States tries to

distinguish Fund for Animals on two grounds. Neither

has merit.

First, the federal government notes (at 22) that HHS

“retains authority to review and accept or reject the

Board’s standards.” But that is true “only in the sense

that the agency can amend or repeal the Certification

Rule altogether.” Pet. App. 183a (Ho, J., dissenting).

That is precisely the type of “extreme remedy” the Second Circuit described as “an agency abdicat[ing] its ‘final

reviewing authority.’” Fund for Animals, 538 F.3d at 133

(citation omitted).

Second, the United States insists (at 22) that the

MCO contract approval process “is closely ‘superintended by HHS in every respect.’” But a certification

from a Board-certified actuary that an MCO contract

complies with standards promulgated by the Board is a

necessary (if not independently sufficient) condition for

7

HHS to exercise any reviewing authority. See 42 C.F.R.

§ 438.6(c) (2002). If a private actuary approves the capitation rates, HHS may still disapprove them. Pet. App.

22a. But if a private actuary “determine[s] that a capitation rate is not actuarially sound,” HHS’s supposed “review process ends before it ever begins.” Pet. App. 177a

(Ho, J., dissenting). As a result, private actuaries “act as

veto-gates that categorically preclude agency review—

whether it’s review of the ‘actuarially sound’ standard itself, the determination that a capitation rate complies

with that standard, or both.” Pet. App. 178a. In other

words, HHS has “abdicate[d] its ‘final reviewing authority’” for any capitation rate that a private actuary disfavors. Fund for Animals, 538 F.3d at 133 (citation omitted). Such a rule would be unconstitutional under the

Second Circuit’s rule. By concluding otherwise, the Fifth

Circuit created a split with the Second Circuit that merits this Court’s attention. 2

II. The Fifth Circuit’s Statute of Limitations Ruling

Creates a Circuit Split About an Important

Federal Question.

Also worthy of this Court’s review is the Fifth Circuit’s conclusion that Plaintiff-States’ APA claims were

barred by the statute of limitations. That holding also

creates a circuit split—this time with the D.C. and Ninth

Circuits. See Sup. Ct. R. 10(a), (c). 3

The need for review is particularly acute because, as this Court

has recognized, “Medicaid spending accounts for over 20 percent of

the average State’s total budget, with federal funds covering 50 to

83 percent of those costs.” Nat’l Fed’n of Indep. Bus. v. Sebelius,

567 U.S. 519, 581 (2012).

2

Because both questions presented are independently certworthy, the United States’ assertion (at 31-33) that the existence of the

second question presented makes this case a poor vehicle to address

3

8

When it promulgated the Certification Rule in 2002,

HHS may have adopted a framework without content—

which is impermissible under the APA. E.g., United

States v. Picciotto, 875 F.2d 345, 347-48 (D.C. Cir. 1989).

Other Circuits have recognized that the absence of that

content meant that Plaintiff-States could not be “expected to anticipate all possible future challenges to a

rule and bring them within six years of the rule’s promulgation, before a later agency action applying the earlier rule leads to an injury.” Cal. Sea Urchin Comm’n v.

Bean, 828 F.3d 1046, 1049-50 (9th Cir. 2016) (citing Bennett v. Spear, 520 U.S. 154, 178 (1997)).

Here, the Fifth Circuit acknowledged that the Board

did not adopt a binding standard for “actuarial soundness” for state Medicaid plans until 2015. See Pet. App.

6a-7a, 9a-10a. Under an earlier “nonbinding ‘practice

note,’” States had the option to exclude some or all of the

HIPF from capitation rates in their contracts with

MCOs. See Pet. App. 9a. As the United States’s own authority demonstrates, this regime engendered “ambiguities around actuarial soundness.” Aaron Mendelson et

al., New Rules of Medicaid Managed Care—Do They

Undermine Payment Reform?, 4 HEALTHCARE 274, 274

(2016) (footnote omitted). But the promulgation of ASOP

49 in 2015 led HHS to take “‘direct, final agency actions’

against” Plaintiff-States, “triggering . . . new six-year

statute of limitations periods.” Pet. App. 69a. Specifically, “HHS released a guidance document” making it

explicit that actuaries were required to follow ASOP 49

when evaluating MCO contracts. Pet. App. 71a-72a.

the first is entirely without merit. Moreover, adopting it would mean

that the Certification Rule would never reach this Court because the

Board chose not to exercise its delegated authority until the APA’s

statute of limitations had run. That cannot be the law.

9

Until then, any action involving the HIPF carried no

legal consequence, meaning that there was no final

agency action, so the statute of limitations had not yet

begun to run. Louisiana v. U.S. Army Corps of Eng’rs,

834 F.3d 574, 584 (5th Cir. 2016). 4 Petitioners brought

suit in October 2015, ROA.21-40—well within the six

years permitted to challenge an improper regulation under the APA. See 28 U.S.C. § 2401(a).

But the Fifth Circuit concluded that HHS’s 2015

guidance document “did not create any new obligations

or consequences.” Pet. App. 16a. In doing so, the Fifth

Circuit split from the D.C. Circuit’s decisions about when

similar documents constitute final agency action. For example, in National Environmental Development Ass’n’s

Clean Air Project v. E.P.A., the D.C. Circuit concluded

that an agency directive represents a final agency action—and therefore starts the limitations clock—when

the directive “provides firm guidance to enforcement officials about how to handle permitting decisions” and

“compels agency officials to apply different permitting

standards in different regions of the country.” 752 F.3d

999, 1007 (D.C. Cir. 2014). Because HHS’s 2015 guidance

removed any discretion in when—and how much of—the

HIPF must be included in capitation rates, PlaintiffStates had six years to challenge that guidance under the

APA. Cf. Gen. Elec. Co. v. E.P.A., 290 F.3d 377, 383 (D.C.

Cir. 2002).

The United States attempts (at 26) to distinguish

these cases on the grounds that they did not “involve[]

the application of a statute of limitations.” But that is a

distinction without a difference. The United States does

Moreover, HHS began applying ASOP 49 as the binding standard applicable to States through the Certification Rule when it reviewed petitioners’ 2015 MCO contracts. ROA.297-301, 3243.

4

10

not dispute that the Fifth Circuit correctly held that a

party may bring an as-applied challenge to a final agency

action applying an allegedly unlawful regulation even after a facial challenge to the rule would be untimely. Pet.

App. 14a (citing Dunn-McCampbell Royalty Int., Inc. v.

Nat’l Park Serv., 112 F.3d 1283, 1287 (5th Cir. 1997)).

The Fifth Circuit’s opinion splits from the D.C. Circuit’s

rule on what constitutes a final agency action. Compare

Pet. App. 14a, with, e.g., Nat’l Env't Dev. Ass’n’s Clean

Air Project, 752 F.3d at 1006-07.

The Fifth Circuit also split with the Ninth Circuit’s

decision in California Sea Urchin Commission v. Bean,

828 F.3d 1046. There, as here, the plaintiffs challenged

the application of an agency regulation that was promulgated outside the limitations period. Id. at 1049. The

Ninth Circuit concluded that such an application triggered a new statute of limitations period. Id. The United

States’s proffered distinction of California Sea Urchin

(at 26) merely reiterates that the Fifth Circuit reached a

different conclusion than the Ninth Circuit did in a similar situation.

In sum, the Ninth and D.C. Circuit have correctly refused to allow agencies to shield their actions from judicial review by waiting until the statute of limitations has

run to enforce the rule. This Court should grant review

and correct the Fifth Circuit’s contrary conclusion.

III. This Is a Proper Vehicle to Resolve the Questions

Presented.

Finally, the United States’s own brief demonstrates

(at 27-31) why its justiciability arguments do not prevent

this Court’s review. Indeed, if it were serious about those

concerns, the United States would have raised them as

jurisdictional reasons the Court cannot reach the questions presented, not vehicle defects for why it should not.

11

The United States did not do so because the arguments

are irreconcilable with its position that the States should

have challenged the Certification Rule in 2002—before

the HIPF was created, let alone repealed.

The United States’ position is also wrong. As the

Fifth Circuit held, petitioners have suffered “a particular

injury in fact—having to pay millions of dollars” because

of the HIPF—that is traceable to the Certification Rule’s

mandatory requirement that States pay the tax on behalf

of their MCOs. Pet. App. 11a-14a. Although the HIPF

has been repealed, the unconstitutional structure that allowed private entities to impose the HIPF (and other

costs) on States will continue to regulate the “complex

ongoing relationship” that is Medicaid. Me. Cmty.

Health Options v. United States, 140 S. Ct. 1308, 1330

(2020). Moreover, the relief the district court ordered—

equitable disgorgement—would provide “effectual relief” for the Plaintiff-States’ injuries, Chafin v. Chafin,

568 U.S. 165, 172 (2013), and such relief is the type of

“specific relief” available under the APA, Bowen v. Massachusetts, 487 U.S. 879, 910 (1988). As a result, there

are no vehicle problems that prevent this Court from addressing the important nondelegation and statute of limitations issues presented here.

12

C O NC LU SIO N

The Court should grant plenary review of the Fifth

Circuit’s holdings regarding the Certification Rule and

should vacate its rulings regarding the HIPF statute under United States v. Munsingwear, Inc., 340 U.S. 36

(1950).

Respectfully submitted.

KEN PAXTON

Attorney General of Texas

BRENT WEBSTER

First Assistant Attorney

General

OFFICE OF THE

ATTORNEY GENERAL

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

Judd.Stone@oag.texas.gov

(512) 936-1700

NOVEMBER 2021

JUDD E. STONE II

Solicitor General

Counsel of Record

LANORA C. PETTIT

Principal Deputy Solicitor

General

CODY RUTOWSKI

Assistant Solicitor General